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Aquatech Is A U S Based Company That Manufactures Sells and Installs

Aquatech, a U.S. company that manufactures and installs water purification equipment, recently sold a system to Nagasaki, Japan for $20 million yen. The payment is due in three months. Aquatech wishes to hedge against currency risk and protect the dollar value of the receivable. Options are available from Kyushu Bank to buy or sell yen at 118 yen per dollar, with premiums of 1% and 3% respectively.

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161 views1 page

Aquatech Is A U S Based Company That Manufactures Sells and Installs

Aquatech, a U.S. company that manufactures and installs water purification equipment, recently sold a system to Nagasaki, Japan for $20 million yen. The payment is due in three months. Aquatech wishes to hedge against currency risk and protect the dollar value of the receivable. Options are available from Kyushu Bank to buy or sell yen at 118 yen per dollar, with premiums of 1% and 3% respectively.

Uploaded by

trilocksp Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Solved: Aquatech is a U S based company that

manufactures sells and installs

Aquatech is a U.S.-based company that manufactures, sells, and installs water purification
equipment. On April 11, the company sold a system to the City of Nagasaki, Japan, for
installation in Nagasaki's famous Glover Gardens (where Puccini's Madame Butterfly waited for
the return of Lt. Pinkerton). The sale was priced in yen at ¥20,000,000, with payment due in
three months.
Spot exchange rate:.........................¥118.255/$ (closing mid-rates)
1-month forward rate:.........¥117.760/$, a 5.04% per annum premium
3-month forward:...............¥116.830/$, a 4.88% per annum premium
1-year forward:.................¥112.450/$, a 5.16% per annum premium
Money Rates________United States________Japan________Differential
One month.................4.8750%..................0.09375%.................4.78125%
Three months..............4.9375%..................0.09375%.................4.84375%
Twelve months.............5.1875%.................0.31250%.................4.87500%
Note that the interest rate differentials vary slightly from the forward discounts on the yen
because of time differences for the quotes. The spot ¥118.255/$, for example, is a mid-point
range. On April 11, the spot yen traded in London from ¥118.30/$ to ¥117.550/$.
Aquatech's Japanese competitors are currently borrowing yen from Japanese banks at a spread
of two percentage points above the Japanese money rate. Aquatech's weighted average cost of
capital is 16%, and the company wishes to protect the dollar value of this receivable.
3-month options from Kyushu Bank:
• Call option on ¥20,000,000 at exercise price of ¥118.00/$: a 1% premium.
• Put option on ¥20,000,000, at exercise price of ¥118.00/$: a 3% premium.
a. What are the costs and benefits of alternative hedges? Which would you recommend, and
why?
b. What is the break-even reinvestment rate when comparing forward and money market
alternatives?

Aquatech is a U S based company that manufactures sells and installs

ANSWER
https://solvedquest.com/aquatech-is-a-u-s-based-company-that-manufactures-sells-and-installs/

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